Treasury bears may be in hibernation and the February equity rout behind them, but investors had better get used to lackluster returns.
So say strategists from Goldman Sachs Group Inc. who warn higher volatility will sap equity gains while bonds lose their hedging potency.
“This moderation in risk-adjusted returns has begun to play out quickly, in particular due to the low-vol regime fading and equity/bond return correlations becoming positive,” Goldman strategists led by Ian Wright wrote in a note on Friday.
From rising rates to slowing growth, risks are multiplying. That leaves those who rely on a traditional stock-bond portfolio split in developed markets most exposed as asset classes that had once once balanced each other out now fall together.
One proxy for the industry’s prospects, the DFA Global Allocation 60/40 portfolio, illustrates the shift. Last year, benign stock-bond correlations and an unstoppable bull market pushed 30-day volatility to a record low of 2.5 percent. Now, realized price swings stand at an elevated 11.6 percent — compared with a 9 percent post-crisis average — crimping returns adjusted for risk.
Goldman recommends equities over credit “given the growth impulse has already led to a large tightening in credit spreads.” But even stocks should be taken with caution because earnings may succumb to growth disappointments.